A Civic Going Out of Business Sale

State and local governments from coast to coast are making major budget cuts as they grapple with plunging revenues and years of deferred investment and maintenance. One refrain of some has been that just like with household budgets, government simply cannot spend more than it takes in. Thus painful cuts are the only option.

There’s no doubt this is true in the short term. Clearly, we have to make adult decisions about priorities and can’t spend money on everything, no matter how much shrieking about the end of the world every single special interest group on the planet makes when they are asked to step up to the plate and do their fair share to balance the budget.

But let’s take this household analogy further. Let’s say a family is forced to make major cuts, to the point where they have to start cutting back on maintaining their car. They can’t afford oil changes, tires, brakes, etc. when the old ones wear out. All they have money for is food and shelter. In a sense it would be true to say that they don’t have money to spend on oil changes. But if you can’t afford to pay to maintain your car, what you’re really saying is that you can’t afford the car, period.

Similarly for cities, if they can’t afford to maintain their infrastructure, run decent schools, or provide any services other than basic public safety (and often even having to make cuts in that), what they are really saying is that they can’t afford to be a city.

That’s the situation too many places find themselves in. They can’t afford to be cities, and so are really in the process of an extended civic going out of business sale. As with a company that has been issued a going concern warning by its auditor and is about to be delisted from the stock exchange, people smell the whiff of death about it, so it doesn’t attract many customers or investors. Which is to say that people aren’t moving there – they are moving out if anything – and businesses are staying away. Who wants to stake their personal or financial future on a place that might not have a future of its own?

This is something merely balancing this year’s budget isn’t going to fix. What’s really needed is to restore investor confidence. That’s going to take more than balanced budgets. Just as most companies don’t fail because their costs are too high, but rather because of the forces of creative destruction, excess leverage, poor product positioning, quality and customer service issues, a bad strategic concept, etc., most cities don’t fail because their budget’s too big, but because they are no longer relevant to the marketplace. They are selling an inferior version of a product that customers no longer want to buy.

For too many struggling cities, especially former industrial towns, even if their current service levels could be delivered for a budget of zero that wouldn’t save them.

The real issue with many cities is that their leaders spend too much time grappling with short term issues, particularly budgets in the present day, and not nearly enough time thinking about where the trend line is taking them and what they need to do to drive a materially better outcome in the future.

That’s the challenge – and a hard one. Cities with long standing enlightened leadership and populations – like Columbus, Indiana, for example – have been able to stay strong by staying ahead of the curve. For those where the rot has already taken hold, it’s a far greater struggle. This applies not just to regions, but also struggling suburbs and inner city neighborhoods even within thriving metro areas.

By all means budgets have to be balanced and spending bloat can kill you. Fiscal and operational matters must be attended to. But until these places take a hard, spare no illusions look in the mirror and develop a compelling reason for a person or business to hitch their fortunes to these places instead of thriving ones elsewhere, too many older cities will continue on the slow road to oblivion.

This post originally ran on September 30, 2010.

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Fr all its pettiness, I have been pleasently surprised how Cincinnati has responded to this crisis by pushing the “We are bankrupt” crowd to the side and making arguments for investing for the future. Other cities I’m familiar with such as St. Louis and even Cleveland seem to be moving forward too. I think that the ironic collapse of all parts of America has forced many to be far more savvy and strategic about local development without any boom town or exurbs to flea to in search of places to invest. I worry most about metros that are too dominated by one employer or industry and are too small or isolated to engage the larger economy.

The unfortunate fact is some cities in an effort to maintain the status quo has taken to raising income through increased taxes. This hurts either citizens who themselves are struggling to survive in hard economic times or businesses who are facing the same problems. The solution should be balancing the actual needs of the community with the wants and nice to haves!

How many municipal governments really need fulltime elected officials or at least as many as they have today? Do they need to continue to pay the huge salaries to the senior officials and to those officials need spokespeople to speak for them? Does the city really need a new arena or library or….? Yes in the past when the economy was growing these type of things were affordable but in today’s economy are they realistic and economically feasible?

Municipalities need to quit worrying about how great they look to people outside the area and worry about how they treat the citizens and businesses they already have. If those people are happy and support the government and the city people and industries will want to move there!

I disagree on the ability of cost containment to save a dying city, for the sole reason that cities die because they stop providing wealth.

But wealth is a function of two variables: income, and expenses. (Some might say three variables, to include time. But for purposes of demonstration it makes no sense to include a variable over which cities have no control).

City services lower the cost of living. Any way to make city services better or more ubiquitous will lower the cost of living of its inhabitants. This increases wealth and prosperity…even when income is falling.

Furthermore, costs…even if they aren’t a “cost of living” are ultimately a barrier to entry…whether they are a barrier to entry to an immigrant wanting to start a new life or a barrier to entry to a marginally profitable business. A taco truck business can provide poverty to a family in a high cost city, but it can provide prosperity for generations in a low cost city.

Cost efficiency is paramount. Without cost efficiency, cities just trade one type of expense for another. Some will choose lower taxes and lower services, some will choose higher taxes and higher services. In either scenario, there are very marginal benefits to the wealth and prosperity of its inhabitants.

True cost containment means providing more and using less. And I see no reason why the same principle which raises individuals and families out of poverty can not do the same for a community or a city.

I just read the link to Columbus, Indiana, and was struck, midway through, that this is another “Hoosiers” story, like the movie, of a small town doing well.

I’ve been thinking a lot lately about cities that are making by being very good at what they do. Friends in the economic development business talk a lot about the good long term prospects of Dayton, that it’s not quite Austin or Madison, but well up there on the way to going somewhere, or at least being some place. The same seems to apply to Columbus.

I mention the “Hoovers” movie line because it is basically about humble Midwesterners doing well by doing the basics well; yes, talent helps, but so does work, and that’s where the storyline is different from Cinderella. In that movie the underlying unique beauty is discovered. Only one person gets to go home with the prince. And that seems to be what so many cities are trying to be- Cinderella, by dressing themselves with the right kind of redevelopment project, or by stressing some kind of industry (High tech! Green power! Biotech! -all copycat solutions) instead of finding what they do well, and updating that to 21st century markets.

The unfortunate fact is some cities in an effort to maintain the status quo has taken to raising income through increased taxes.

And you should name them because they are the exceptions. The norm has been for governments to lay off employees, and public-sector layoffs are the echo shock to the jobs stagnation. We’ve wrongly assumed government caused “crowding out” (currency supply and value are fixed, and each dollar given to the public sector is taken away from the private sector).

The money taken away from the private sector has not created tangible activity in the private sector, and you’re now seeing the stagnation problem compound itself. With public workers now unemployed, their spending is reduced and their future earning power is diminished because they’ve joined a growing unemployment pool.

How many municipal governments really need fulltime elected officials or at least as many as they have today? Do they need to continue to pay the huge salaries to the senior officials and to those officials need spokespeople to speak for them?

That’s nibbling at the margins. Going after the top positions won’t affect the payroll problems imposed by the size and scope of the rank-and-file workforce. Public safety employees, in particular, impose the costliest payroll and pension burdens.

Does the city really need a new arena or library or … ?

No, cities don’t need arenas or libraries, or really anything beyond food and shelter. They still build them, though, because someone wanted them badly enough to get them built in the first place.

Another answer to the question is, “It depends.” The economy didn’t keel over because we built one arena or library too many. And even austere communities that had the good sense or good fortune to avoid building arenas or libraries are suffering for entirely different reasons.

Municipalities need to quit worrying about how great they look to people outside the area and worry about how they treat the citizens and businesses they already have.

Really? This is not advice I’d give to Honolulu, Las Vegas or Orlando, for instance. The citizens and businesses these areas already have stake their livelihoods on outsiders — these three, in particular, to an extreme degree.

This is not advice I’d give to a small town or suburb in California, either. They promise Low Taxes! High Property Values! Good Schools and Government Services! How? Fiscalization of land use, aka sales tax farming. These small communities can promise their residents the good life and a free lunch. These cities do this by building shopping centers or auto malls to entice non-residents to drop coin, and they live off the fat of the sales tax. (You see the problem: The regime works only as long as outsiders, who spend but don’t derive municipal benefits, keep coming.)

Wad, “The regime works only as long as outsiders, who spend but don’t derive municipal benefits, keep coming.”

The regime also works for a city only as long as there are relatively few outsiders (suburban commuters) who derive municipal benefits. There is a tipping point, when the city begins to mostly serve its suburban commuters (regional attractions, health care, and expensive urban infrastructure to support the same).

At some point in the last 10-40 years, this point has been reached in “landlocked” central cities like St. Louis, Cleveland, Detroit, Philadelphia, Chicago, Pittsburgh, Cincinnati, MSP. (Indianapolis is a special case, though it is also landlocked. It still has about half the metro population, a far higher percentage than any of the others listed above.) Some of those cities have found a solution, and some haven’t.

Note that these are all cities where the primary fiscal contributors have long been property (and some income) taxes, not sales taxes. So commuters and visitors leave (or left, until things changed) relatively little behind.

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Rod, Columbus did NOT just “do well by doing the basics well”. It had the advantage of an accident of history: two hometown companies grew up to be Fortune 500 corporations. Columbus once had more Fortune 500 HQs (Cummins and Arvin) than Indianapolis (Lilly). Columbus also built an outsized reputation in the design world by a conscious program (funded by J. Irwin Miller, a wealthy philanthropist from a banking and industrial family). His own home, an Eero Saarinen design, has been featured on this blog.

It wasn’t “Hoosiers”. More like “Field of Dreams”. Columbus might just be the earliest incarnation of big “if you build it, they will come” thinking: Miller was concerned about the ability of the two hometown companies to attract top talent to a small town in Indiana. Even in the 1960’s, both companies favored MBAs and major-college grads as young manager-trainees and talent attraction was a big issue.

This combination fueled the “transplant” boom of the 1980’s, when a large number of Japanese companies located component factories there. Toyota put its industrial forklift division there, too. It was, in part, because Columbus had an international profile that they exploited, as opposed to Anderson and Muncie, two GM-division Indiana cities that had a plethora of laid-off industrial workers available but no far-sighted leadership.

[Columbus has had a failure or two, also. They built a downtown mall in the 1970’s, which failed slowly after the old county fairgrounds were redeveloped as another mall. The downtown mall has been re-imagined, and the city has re-emphasized its remaining “Main Street” style historic commercial downtown.]

Chris: could it be that foreign companies avoided Anderson and Muncie because of lingering UAW influence? Nissan’s Smyrna plant did not hire people who had worked for American car companies, and was of course located in a right-to-work state.

Alon, Cummins is unionized. Production workers in Columbus are represented by the (independent) Diesel Workers Union. I think Arvin was also organized, though I do not know by whom. (ArvinMeritor, the successor company headquartered in Michigan, is no longer a dominant force in Columbus.)

Toyota, Subaru, and Honda have all put assembly plants in Indiana, more different transplant assembly operations than any other state. Though they did not go direstly to cities and towns where the Big Three had operations, they are near Evansville and Indianapolis and Lafayette, where there were significant union manufacturing operations. Indianapolis in particular had a number of UAW sites, some of which were on its east side, 50 miles or less from Greensburg (Honda’s plant site) and within commuting range.

As to avoiding Muncie and Anderson, I’d give a “maybe”.

I’m not sure the whole “transplants avoiding unions” meme is cut-and-dried in regard to Indiana.

About Aaron M. Renn

Aaron M. Renn is a Senior Fellow at the Manhattan Institute and an opinion-leading urban analyst, writer, and speaker on a mission to help America’s cities thrive and find sustainable success in the 21st century. (Photo Credit: Daniel Axler)